EBUS Chapter 5

• Financial management


  Involves the responsibility of timeously acquiring the needed financial resources under the best conditions possible, and ensuring the best or optimal use of these resources over the short and long term
• Finances


  Money or other resources that can be converted into money such as assets, stocks, investments, capital, savings, funds etc.
• The financial function in any enterprise/organisation

  • The financial function does not work in isolation. All business functions (e.g. marketing, human resources etc.) are interrelated.
  • The financial function must COLLABORATE/WORK TOGETHER with other business functions to ensure that goals are achieved and a successful organisation is created.
• The managerial functions of financial management

  1. Financial Planning

  2. Financial Organising

  3. Financial Leading

  4. Financial Control
• Financial Activities


  • Obtain External Information
  • Preparing Financial Budgets
  • Recording all Financial Transactions
  • Analysing Financial Performance
  • Financial Reporting
  • Protecting/safeguarding Cash Resources
  • Formulating Credit Policy
  • Debt Collection
  • Salary Administration
  • Negotiating with Suppliers of Capital
• Assets


  Main objective of a private organisation: Maximise the rate of return on investment to the owners(s) over the long term, taking into consideration the interests of all applicable stakeholders. To achieve this, the business needs ASSETS
• Types of Assets


  • Fixed/Non-Current Assets
  • Current Assets
  • Other Assets
• Types of Capital


  • Own Capital (Equity, Share capital, Internal Sources)
  • Outside Capital/Liabilities (Foreign, Borrowed, External Source)
• Specific types of outside capital

  • Permanent
  • Long-Term
  • Medium-Term
  • Short-Term
• Permanent Capital


  • Amount of assets, funds, money required by business AT ALL TIMES (e.g. over a yr)
  • Variable - additional amount of assets/ money required from time to time (E.g. during Easter / Christmas)
• Factors to consider when choosing sources of capital (finance)

  • Matching life expectancy of assets and credit time available
  • Availability and Accessibility issues
  • Costs associated with a specific source
  • Independence vs. Dependence and control
  • Freedom of Application of capital (finance)
  • Effects of financial leverage
  • Considerations of liquidity and profitability
  • Tax Considerations
  • Building Long-term Relationships
• Typical Problems in Obtaining Finance

  • Own Capital Contribution- Too Small
  • Lack of Experience in Financial Management
  • Lack of Financial Expertise
  • Too much emphasis on collateral
  • Lack of Planning
• Interest rate on borrowed capital

  Increase in own profitability (opposite is also true)
• Effects of financial leverage

  • Factors to consider when choosing sources of capital (finance)
  • Specific source can have a direct influence on liquidity and profitability
  • In short term you focus on liquidity
• Tax considerations


  Every decision has tax implications
• Building long-term relationships


  Combine wisdom and strength
• Typical problems in obtaining finance

  • Own capital contribution too small
  • Lack of experience in financial management
  • Lack of financial expertise
  • Too much emphasis on collateral
  • Lack of planning
  • Creditworthiness
• Debtor


  Sum of money owed by a business to the suppliers of a business
• Creditor


  Sum of money owed to a business by the consumer
• The credit transaction


  1. Provide goods & services

  2. Receive payment
• Forms of credit


  • Open account
  • Revolving credit
  • Instalment credit
  • Other forms of credit
• Cash or credit


  Scenarios where a consumer pays cash or uses credit
• Advantages of granting credit

  • Increasing sales
  • Increasing market share
  • Facing competition
  • Selling more expensive products
  • Cross-selling to existing consumers
  • Retaining customer base
  • Evaluating exchange & adjustment requests
  • Aiding advertisements and communications
  • Increasing profit
• Disadvantages of granting credit

  • Higher administrative & operational costs
  • Possibility of late payment by debtors
  • Likelihood of bad debts
  • Increased need for capital
  • Slower cash inflow
• Credit policy


  Realistic and sound approach to extending credit to customers
• 7 C's of creditworthiness


  • Credit history
  • Capital
  • Conditions
  • Capacity
  • Character
  • Collateral
  • Common sense
• Implementing credit decisions


  1. Confirming the outcome of an application

  2. Signing a formal agreement

  3. Ensuring efficient and effective administration
• Controlling debtors' accounts


  • Sound administration
  • Follow-up
• Financial structure


  Composition of assets and capital (own or outside)
• Profitability


  ROI/ROA (Return on Investment), ROE (Return on Equity)
• Liquidity


  Ability of the business to pay its short-term financial commitments on time
• Solvency


  Degree to which total assets of the business cover its total liabilities